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Don't play with bonds.
#1
Let me rephrase the title.... Don't ever invest in bonds if you do not understand the basic fundamentals.  I am no bond guru for sure, but I have warned a few here to be careful and I think it deserves a thread now.    

Here are a few bond proverbs I've heard oft repeated my entire investing career that spans over 35 years.... 

-Bonds are part of every diversified portfolio.

-Subtract your age from 100, invest the resulting in equities, the rest should be in bonds for diversification.

-Bonds are safer than equities.  

-When you retire you should have at least 40% of your assets in bonds.  Even more as you age.

Well that was then and this is now.  I never followed any of that advice.  I held a small amount of diversified term bonds (fund)  through the decades.  It was my belief equities would outperform.  Bonds weren't so horrible.  Long-term bonds tended to rise when equities corrected.  Your bonds might be up 20% when the stock market corrected 20%.  I could flip your bonds to stocks and buy some stocks on sale every few years. 

It was all good as interest rates on average slowly dropped for four decades.  2019-2020 were more than pretty good years for bonds.  So what is the problem?  If you aren't aware, the value of your bond capital moves inversely to interest rates.  If you are in bonds and interest rates drop 2% then your portfolio (individual bonds, mutual funds or you ETF is worth more money as it is invested at an above market rate).  The inverse is just as true.  It's no small matter if you are on the wrong end of the rate move.  Here is an example and I will round the numbers.

Vanguard Extended Duration ETF EDU.  It's a respected fund.  Vanguard does nothing unnecessarily reckless and their bond funds have above average ratings.  EDU yields 2.2% currently.  It's invested in US Treasury bonds mostly over 20yrs in duration.  US Treasuries are about as safe as anything in this world.  Your capital is down 17% YTD. That is only 10 weeks!  It will theoretically take you 8 years to be even if interest rates were level from here.  What caused this?  A 3/4% rise in interest rates.  That's not much, but on a percentage basis it is at near zero short term interest.  

This is much of the reason investors are paying too much for equities with a modest dividend.  It's no more dangerous than this long bond example.  I hold a considerable amount in ultra short term bonds as a cash alternative.  The yield is only .6% currently.  That isn't attractive but my capital loss is not 17% YTD.  I am about even.  (I gave up my meager interest as of today).  My capital is still there.  I can sleep well with that risk/reward.  

Are bonds bad forever?  No they are not, but you better know what you are getting into.  If rates raise another 3/4% long bonds are going to get much uglier.  Bonds and interest rates may be boring to you, but they have an extraordinary effect on the capital markets and some understanding is highly recommended.    

Comments from others wiser than I are certainly welcome.  I tried to keep this very basic because basic can make or break your bond investment.  There is nothing particularly complicated about what just occurred to long bond funds.
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#2
Great thread idea. Last year, I took a long look at bond funds and I came to the realization that a steady dividend "value trap" like AT&T is still better.

That said, actual bonds aren't a bad idea. I just received a check a few months ago from one I held for 5 years.
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#3
(03-15-2021, 07:48 PM)ken-do-nim Wrote: Great thread idea.  Last year, I took a long look at bond funds and I came to the realization that a steady dividend "value trap" like AT&T is still better.  

That said, actual bonds aren't a bad idea.  I just received a check a few months ago from one I held for 5 years.
Good point.  Yes if you buy one and never sell it you will receive the yield and your principal back.  Right now that is about  2% for a 20 year hold.  ATT giving back 2-3% of your capital annually as it has is still better by a couple hundred basis points over a current bond.  Bonds are that bad right now.
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#4
Time frame is everything. Last year from Jan to April EDV was up 32% while the stock market was down 10%. When the SHTF you will want some long bonds.


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#5
(03-16-2021, 10:42 AM)jalanlong Wrote: Time frame is everything. Last year from Jan to April EDV was up 32% while the stock market was down 10%.  When the SHTF you will want some long bonds.


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It is, but the general guidance is you need to just hold XXX percentage.  I;ve read that 10,000 times from reputable sources.  I thought the risk/reward was about 5-1 against when short-term rates went to zero.  2% yield vs 10% capital loss.  The reality is 10-1 against is likely the actual outcome.  It's a completely different game when a safe long-term bond or fund yields 5%.  A 1% move is not such a big deal.  Now a 1% move is over a 100% move in the ten year from last summer.  Bond prices say it was a big deal and the move wasn't even 1% yet.   

Anyway, I don't hate bonds forever but being down 20% on a 2% yielding safe investment is not my idea of safe.  I thought this was easy to see coming with FED and GOV actions.  That was really my only point.  As Ken mentioned it truly does make T look very attractive, even with all their fleas.
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#6
Right now I keep them as 20% of my portfolio for safety in situations like 2008 or early last year. They are a high price to pay to damper portfolio volatility though.

If I could talk myself into it I would get rid of that and gold and go all in on cash and dividend growth stocks.


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#7
The more I read on financial sites, the more "rules of thumb" I start to throw out. Another one I think is bunk is basing your retirement needs on 70% of your salary the year before you retire. Absolutely not! Build a budget, think about travel expenses and what not, and go from there. Your retirement budget has absolutely nothing to do with how much you used to earn.
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#8
(03-16-2021, 11:25 AM)jalanlong Wrote: Right now I keep them as 20% of my portfolio for safety in situations like 2008 or early last year. They are a high price to pay to damper portfolio volatility though.

If I could talk myself into it I would get rid of that and gold and go all in on cash and dividend growth stocks.


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Most of my investing career they were not at all a high price to pay for some insurance.  The risk/reward was not out of balance for decades.  The game COMPLETELY changed last year unless you thought we might go negative interest rates.  That's not out of the question a year or two from now if the economy runs out of gas.  For now it is out of the question as we come out of Covid.  I really think LT bonds get hit worse by summer.  I saw zero safety in them starting about MAR 2020.  I ran to ultra short-term bonds hating the small yield.  Turned out not much better than cash.  

I skipped gold until a year ago.   I sell puts on the top miners (NEM and GOLD), so I have some hedge on my hedge.  Didn't time it perfectly as always but get by with it anyway as premiums and dividends cover small dips in gold prices.  I am not comfortable holding a lot of anything PM related.
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